RBA likely to watch unemployment as job ads soften

Australia's labour market sent mixed signals in June, with the Reserve Bank of Australia likely to focus on the unemployment rate, CreditorWatch said.

Employment rose by 76,000 in June, far above market expectations for a 15,000 increase, but the headline unemployment rate was unchanged at 4.4%. In unrounded terms, the rate increased from 4.37% to 4.43%, leaving it above the RBA's May forecast average of 4.2%.

CreditorWatch said temporary factors helped drive part of the employment gain. More people who had been waiting to start a job in May began work in June, while fewer people than usual left jobs during the month, lifting employment in seasonally adjusted terms.

That has complicated the reading of the labour market. While the employment figure was strong, the underlying trend appears softer because unemployment, underemployment and youth unemployment have all been rising.

Underemployment was revised sharply for May, with the estimate lifted from 5.9% to 6.3%, before rising again to 6.5% in June. The youth unemployment rate also increased slightly in June after falling in May, continuing a broader upward trend that can be sensitive to changes in labour market conditions.

CreditorWatch said the central bank tends to put more weight on the unemployment rate when monthly employment data is volatile. That matters now because unemployment appears to be edging up faster than the RBA expected in its previous forecasts.

The latest data will feed into the RBA's next forecast revision and could, at the margin, lead to a lower wages outlook, CreditorWatch said. It also noted that the Fair Work Commission's 4.8% award wage rise could add pressure in the opposite direction.

Job ads

Hiring demand, as measured by SEEK job advertisements, has also softened, though not sharply. Job ads were effectively flat in June, down 0.2% month on month, and have fallen 6.8% since August last year.

Since February, when the US-Iran conflict began, job ads have fallen 3.3%, with most of that decline occurring in May. The data suggests a gradual easing in labour demand rather than a marked deterioration in economic conditions, CreditorWatch said.

CreditorWatch linked the softer trend in advertising to higher oil prices and weaker activity following the conflict, though it said the June result showed no dramatic fall in labour demand. The easing has been evident across most states, with Western Australia and South Australia the main exceptions.

According to the analysis, Western Australia has continued to benefit from strength in selected resource commodities, while South Australia has been supported by strong population growth. State unemployment data had previously pointed to rising unemployment in three of the four largest states, but that now appears to be largely confined to Victoria.

Rates outlook

On monetary policy, CreditorWatch said the latest labour force and job advertisements data support the case for the RBA to leave interest rates unchanged in the near term while it assesses the impact of earlier rate increases, inflation pressures, higher energy prices and budget tax changes.

Current trends in job ads also support the possibility that the next move in interest rates could be lower if labour market softening continues. Even so, CreditorWatch said its central view remains that the RBA will retain a tightening bias.

The assessment reflects a labour market that is easing only modestly rather than weakening sharply. Employment growth remains firm on the headline measure, but broader indicators no longer point to the same level of strength.

"Very mixed messages in this month's data with employment much stronger than expected (+76,000) but unemployment and underemployment now seemingly trending higher (though the latter measure has had some volatility in recent months)," CreditorWatch said.

"When the employment data is volatile, the RBA tends to emphasize unemployment data as this calculation is typically less affected by sampling variations or volatility," it said.

"Job ads were effectively unchanged in June still suggesting there is no dramatic decline in the labour market occurring," it said.